Wednesday, April 27, 2011

Unstructured Thoughts on Advertising

Our analysis treats advertisements and the goods advertised as complements in stable metautility functions, and generates new results for advertising by building on and extending the general analysis of complements. By assimilating the theory of advertising into the theory of complements, we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising. We also use this approach to evaluate advertising from a welfare perspective. Whether there is excessive or too little advertising depends on several variables: the effects on consumer utility, the degree of competition in the market for advertised goods, the induced changes in prices and outputs of advertised goods, and whether advertising is sold to consumers.

When push comes to shove, that's how I think of the consumer side of the advertising market, but what about the producer side of advertising? For a some products, advertising is a necessary part of the production of the good.

Consider the example of a book. Every book has a cover. The effort and expense that goes into designing that cover can be thought of as advertising expenditure because it affects whether the consumer is willing to buy the book (setting the issue of not judging books by covers aside). I'm not sure if publication companies think of cover design as advertising expense, but it wouldn't surprise me if they did. Even if you spend zero effort on the book cover, that's a choice among an entire array of choice for how much effort to spend on the cover.

Fresh fruit also comes to mind. Producers of fruit undertake a variety of activities that affect both the flavor and the appearance of their product. There must be a margin on which these producers trade how appetizing the fruit looks for how appetizing the fruit is. This tradeoff feels like advertising, but that's a strange approach to studying this tradeoff. It would be simpler to pitch this as the fruit producer's choice of product attributes.

Moreover, it isn't clear whether choosing more attractive fruit (at the expense of making it less delicious) should be thought of as more or less advertising. After all, you can think of this problem exactly as choosing less delicious fruit because it wasn't worth the expense of giving up something on the attractiveness margin. In this setting, "more" or "less" depends on what you think you are advertising.

Part of me thinks that this distinction between "external" advertising (like TV commercials, billboards and so on) and "internal" advertising (like above, contextual elements of the product itself) is arbitrary. For some purposes, it might be better to just think of advertising as an attribute of the product.